9th September 2021 - AUD/USD bears stay in control mid-week as risk-apatite deteriorates.

Market Headlines

US equities again weakened slightly amid ongoing concerns about slower growth and stimulus withdrawal. The S&P500 fell 0.2%, as did US bond yields, while the US dollar rose. US 2yr treasury yields ranged between 0.21% and 0.22%, while the 10yr yield fell from 1.38% to 1.33%, reflecting the risk-averse mood. A strong 10yr auction also reflected the mood. Commodities, Brent crude oil futures rose 1.4% to $73, copper fell 1.0%, gold fell 1.5%, and iron ore fell 3.8% to $132.

Overnight Currency Range

AUD/USD 0.7345 0.7403

EUR/USD 1.1802 1.1850

GBP/USD 1.3727 1.3789

USD/JPY 110.15 110.45

NZD/USD 0.7076 0.7115

USD/CAD 1.2625 1.2762

USD/CNH 6.4544 6.4633

AUD/JPY 80.93 81.64

AUD/NZD 1.0375 1.0408

AUD Thoughts

The Australian dollar is regarded as a currency that is linked to the market's risk profile which is currently being undermined by investors moving to the side-lines as central bank narratives turn more hawkish. At the same time, however, there is an air of caution surrounding the spread o the highly contagious Delta coronavirus variant making its way around to the far corners of the world. Of course, markets are really only paying attention to the spread in nations that matter to them, namely major APAC nations such as Australia, and the big three, the US, China and Europe.

In that regard, Australia has struggled with the resurgence of the virus in the form of the new variant due to its slow uptake on the vaccine rollout. The Reserve Bank of Australia has responded in kind to the fresh wave and subsequent lockdowns in the economy by cautiously tapering its financial covid relief quantitative easing programme this week.

The RBA QE purchases are now running at A$4bn/week from this month onwards compared to the earlier rate at A$5bn/week. However, the RBA acknowledged the poorer-than-expected economic outlook and decided to hold the reduced QE pace of A$4bn/week until at least mid-February next year. The dovish taper sent the Aussie into a tailspin following a session of post-RBA volatility.

The US dollar, in turn, was bid owing to the market's growing risk-off stance following a series of disappointing macroeconomic data that stands to throw the global recovery into a fresh slowdown in the coming months. This makes for a bearish cocktail in markets, made up of higher inflation prospects, tighter money conditions and the delta variant infections that are yet to show signs of an apex.

Eyes on the ECB, European stocks skidded to their lowest in nearly three weeks as investors fear that central banks might start to taper their asset purchases as soon as this month.

Analysts are expecting purchases under the ECB's Pandemic Emergency Purchase Programme (PEPP) to be reduced to possibly as low as 60 billion euros a month from the current 80 billion, which would be considered a de-facto taper. The combination of this along with potentially a very cautious stance surrounding the Delta variant and global growth picture could see risk assets fall even further, which would likely fuel a rally in the greenback.

In turn, this would be expected to weigh on the commodity complex and its proxy currency, the Aussie. On the other hand, a more upbeat outcome and sentiment at the ECB would be expected to support risk and related currencies.

As per the prior day's analysis, where it was stated that ''the price has broken key levels to the downside from a daily perspective. Bears will be keen to see a test of the 61.8% ratio ahead of the 30 Aug structure around 0.7320 and near 10 Aug lows at 0.7315,'' the price has indeed continued to deteriorate towards the targets.

Event Risk Data Today

Australia: RBA Deputy Governor Debelle will provide an address to ASIFMA Compliance Week 2021, an online conference. Weekly payrolls for the week ending Aug 14 will be an important update on the impact of lockdowns.

China: CPI inflation is expected to remain weak in August, at a 1.0% y/y rate. Meanwhile, the August PPI release is likely to indicate that upstream price pressures are at or past their peak, at 9.0%y/y. M2 money supply and new loans disappointed in July. The market is hoping for stronger readings in August to alleviate concerns over the outlook for investment.

Euro Area: Discussions at the ECB September meeting are expected to focus on taper shape and speed as well as risks to the outlook.

US: Initial jobless claims are expected to continue to drift lower as the economy reopens (market f/c: 335k). The FOMC’s Kaplan, Daly and Bowman will provide addresses at their respective virtual events.

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